SoFi

One of the key tenets of building a strong portfolio is diversification—investing in different types of assets in order to mitigate risk and see steady long-term growth.

Besides stocks, bonds are a popular asset class which is considered one of the most secure investments one can make. When the stock market is headed for a storm, the bond market can act as a safe haven. Although people talk about stocks a lot more, the bond market is actually quite a bit larger. In 2020 the market cap of the global bond market was about $160 trillion, while the market cap of the stock market was $95 trillion.

The bond market has a long history. The first bonds were issued in the late 1600s by the Bank of England to help raise funds to fight a war against France. Since then, the global bond market has continued to grow and flourish.

So, what exactly is a bond and how does the bond market work?

Why the Bond Market Exists

Just as individuals need to take out loans in order to buy a home or pay for other expenses, governments, cities, and companies also need to borrow money. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time.

Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but individuals are able to lend them a small amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can get better interest rates with bonds.

Bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds.

Recommended: How Do Bonds Work?

For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10 year period, and will pay back the $10,000 at the end of the 10 years.

Bonds are generally issued when a government or corporation needs money for a specific purpose, such as making capital improvements or acquiring another business.

Primary vs Secondary Bond Markets

Bonds are sold in two different markets: the primary market and the secondary market. Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market. One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.

Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating, (more on that below). Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity.

Differences in Bonds

Bond terms and features vary depending on the type and who issues them. The main types of bonds are:

US Treasury Bills

These government-issued short-term bonds are the safest, but pay the least interest. The sale of treasuries funds all government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Longer-Term Treasury Bills

Bonds such as the 10-year note are the next safest option and pay a slightly higher interest rate.

Treasury Inflation Protected Securities (TIPS)

These bonds specifically protect against inflation, so they pay out a higher interest rate than the rate of inflation.

Municipal Bonds

Also known as muni bonds, these bonds are issued by cities and towns. They are somewhat riskier than treasury bills but offer higher returns. Muni bonds are exempt from federal taxes, and often state taxes as well.

Agency Bonds

Agency bonds are sold to fund federal agriculture, education, and mortgage lending programs. They are sold by Government Sponsored Enterprise (GSE) including Freddie Mac and Fannie Mae.

Corporate Bonds

The riskiest bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, and companies always have some risk of failure. The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.

Junk Bonds

Corporate bonds with the highest risk and highest potential return are called junk bonds or high yield bonds. All bonds get rated from a high of AAA down to junk bonds—more on bond ratings below.

Convertible Bonds

Corporate bonds that can be converted into stock at certain times throughout the term of the bond.

Mortgage-Backed Bonds

These bonds consist of pooled mortgages on real estate.

Foreign Bonds

Similar to US bonds, investors can also purchase bonds issued in other countries. These carry the additional risk of currency fluctuations.

Emerging Market Bonds

Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth but can also be riskier than investing in developed market economies.

Zero Coupon Bonds

Zero coupon bonds don’t pay interest, but are sold at a great discount. Some bonds get transformed into zero coupon bonds, while others start out as zero coupon bonds. Investors earn a profit when the bond reaches maturity because it will have increased in value, and they receive the face value of the bond at the maturity date.

Bond Funds

Investors can also buy into bond funds or bond ETFs, which are groups of different types of bonds collected into a single fund. There are bond funds that group together corporate bonds, junk bonds, and other types of bonds. These funds are managed by a fund manager. Bond funds are safer than individual bonds, since they diversify money into many different bonds.

Bond Indices

Similar to a stock index, there are bond indices that track the performance of groups of bonds. Examples of bond indices include the Merrill Lynch Domestic Master, the Citigroup US Broad Investment-Grade Bond Index, and the Barclays Capital Aggregate Bond Index.

What to Look at When Choosing Bonds

When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Stock shares themselves tend to be pretty similar. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.

The main features to look at when selecting bonds are:

Maturity

The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date. Bond maturity dates fall into three categories:

•   Short term: Bonds that mature within 1-3 years.
•   Medium-term: Bonds that mature around ten years.
•   Long-term: These bonds could take up to 30 years to mature.

Secured vs. Unsecured

Secured bonds promise that specific assets will be transferred to bondholders if the corporation is unable to repay the bond loan. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral.

Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. Both have their benefits and disadvantages, so it is a good idea to understand the difference between secured and unsecured bonds.

Yield

This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield fluctuates since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:

•   Yield to Maturity (YTM): YTM is the most commonly used yield measurement. It refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.
•   Current Yield: This calculation can help bondholders compare the return they are getting on a bond to the dividend return they receive from a stock. It looks at the bond’s current market price and the amount of interest earned on that bond.
•   Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t entirely accurate.
•   Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.
•   Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.

Price

This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for. Bond prices change as market interest rates change, along with other factors.

Recommended: What Is Bond Valuation and How Do You Calculate It?

Rating

As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.

Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.

Bond Market Terminology

When buying bonds, there are several terms which investors may not be familiar with. Some of the key terms to know include:

•   Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”
•   Coupon: This is the fixed dollar amount paid to investors. For example, if an investor buys a $1000 bond with a 3% interest rate, and interest gets paid out annually, the coupon rate is $30/year.
•   Face Value: Also referred to as “par,” this is the price of the bond when it reaches maturity. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”
•   Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.
•   Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.

The Bond Market and Stocks

Although there is no direct correlation between the bond market and the stock market, the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.

When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.

How to Make Money on Bonds

While the most obvious way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.

As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.

There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.

Advantages of Bonds

There are several reasons that bonds are a good investment, and they have some advantages over stocks and other assets.

•   Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.
•   Security: Bonds are considered to be a much safer investment than stocks. Although they offer lower interest rates than most stocks, they don’t have the volatility and risk.
•   Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.
•   Diversification: Bonds can be a great addition to an investment portfolio because they provide diversification away from stocks. Building a diversified portfolio is key to long-term growth.
•   Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.
Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and make a profit.

Disadvantages of Bonds

Although there are many upsides to investing in bonds, they also have some risks and downsides. Like any investment, it’s important to do research before buying.

•   Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash isn’t available for use for a long period of time.
Bond Issuer Default and Credit Risk: Bonds are fairly secure, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.
•   Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see greater returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.
•   Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.
•   Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.
•   Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.
•   Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.

How to Buy Bonds

Bonds differ from stocks in that they aren’t traded publicly. Investors must go through a broker to purchase most bonds, or they can buy US Treasury bonds directly from the government.

Brokers can sell bonds at any price, so it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.

As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.

Get Started Buying Bonds

For those looking to start investing in bonds, stocks, and other assets, there are many great tools available to help. One easy way to start buying into the bond market is using SoFi Invest’s® online investment tools. SoFi has an easy-to-use app investors can use to buy and sell bond funds with a few clicks of a button and keep track of their favorite bond funds and stocks, research specific assets, and set personalized financial goals.

Buying into bond funds is a good way for investors to gain exposure to a diversified portfolio of bonds, rather than going through the complex process of choosing individual bonds.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

After years of law school, internships, landing a job at a law firm and working to climb the ladder, some lawyers decide they’re ready to change careers. But, they might wonder, how easy will it be to make a switch?

Fortunately, pivoting after law school may be easier than it used to be, and there are some great alternative careers for lawyers out there—if you know where to look and how to position yourself.

Reasons Lawyers Might Consider Making a Career Switch

It might seem surprising that a lawyer would want to make a career change, after all the years they’ve spent studying and preparing, but it’s not actually uncommon. While TV and film can make it seem like practicing law is a thrilling blend of opening and closing arguments and life-changing verdicts passed down by a jury, there are plenty of mundane tasks in the mix.

In some cases, legal work can be relatively dull. Instead of high stakes court cases, it can be a lot of reading, research, and paperwork. Sometimes the work can be isolating as a lot of time is spent working alone.

Beyond that, lawyers can face a ton of pressure at work, which can lead to a stressful day-to-day work environment. Lawyers have a lot on their plates: tracking deadlines, handling client demands, staying on the partner track, keeping up with the changing laws and regulations, and more.

Not only can the stress of the job be exhausting, getting the job done can require long hours. And at most law firms, lawyers are measured by billable hours. Not how many hours the lawyers actually work, and not the quality of the work, but how many hours they can bill to a client.

Combine that with the fact that oftentimes a lawyer’s schedule is out of their control, dictated by the courts or bosses at a firm, it’s no wonder some lawyers are interested in trying something new.

A career in law, or even a career change to a lawyer, might be worth it for a great paycheck. However, the U.S. Bureau of Labor Statistics reports that the median annual pay for a lawyer in 2021 was $127,990 per year—which means half of the lawyers out there are making less than that. And when you’re dealing with law school debt, that could make for a difficult financial balancing act.

Some law school graduates may decide they could make a decent living and enjoy themselves more in a different profession. And so, they might choose to become a second-career lawyer.

So How Can You Prepare Your Exit Strategy?

Leaving a career as a lawyer can be a huge decision. If you’re considering making a career switch — whether you’re considering a career change to law or a career change out of law — you might want to think about preparing an exit strategy. Here are some ideas for planning ahead as you think about making the jump from lawyer to the new career of your choice.

Aggressively Paying Off Student Loan Debt

If you have solid credit and a good job (among other factors), you may qualify for a better interest rate and/or terms with a private lender.

Having a lot of student debt hanging over your head might limit your options. Student loan refinancing could be a good choice for those who have higher interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.

When should you refinance your student loans? Now might be the right time if you have solid credit and a good job (among other factors). Those things could help you qualify for a better interest rate and/or more favorable terms with a private lender that might help you get out from under that student debt faster.

This student loan refinance calculator can show you how much refinancing might save you.

However, it’s important to be aware that federal loans carry some special benefits that are not accessible if you refinance them into a private loan—such as income-driven repayment. Make sure you won’t need to use these federal programs before refinancing.

Recommended: Student Loan Refinancing Guide

Creating a Budget and an Emergency Fund

Lawyers tend to make pretty decent money right out of the gate (the problem typically comes later when income can start to stagnate), so it may be wise to avoid spending those years letting your lifestyle rise to the level of your income. Instead, put together a budget that allows you to save for the future.

Another wise idea is to start building an emergency fund. If you think your salary will take a hit should you leave the law, that fund could help tide you over until you firmly establish yourself in your new career.

Using Your Time as a Lawyer to Make Connections

As a lawyer, you’ll likely come into contact with people in a variety of different fields. Building professional relationships and keeping them going could pay off when you start putting out feelers. When you approach them, be courteous and respectful of their time, and if you decide to ask someone for help with your new career path, be clear about what you want—advice, an introduction, or a lead on a job.

Recommended: Law School Loan Repayment and Forgiveness Options

Planning Ahead

Try moving your focus from what you don’t like about your current job to how you might transfer your knowledge, skills, and passion to a new career. Lawyers can make good researchers and investigators, compliance professionals, business analysts, real estate professionals, executives, and entrepreneurs. Some go into law enforcement. Others might end up in the media or communications.

Can You Have a Non-Legal Job With a Law Degree?

It’s absolutely possible to make a career change to a non-legal job if you have a law degree. In fact, a law degree can speak volumes about your knowledge, skills, and work ethic. It can help to show that you’re analytical, organized, and good at project management. Plus, you’re aware of the potential legal ramifications of business decisions, which can be very helpful to almost any company.

Probably the biggest hurdle for most people is simply giving up the idea of being an attorney. But if you can open your mind and look at all the other options, you may find something that makes you even happier.

When you’re ready to make the new-career move, refinancing your student loans could help you get your student debt under control so you can more easily move forward. SoFi offers loans with low fixed or variable rates, flexible terms and no fees. Plus, you can find out if you prequalify in just two minutes.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSL0423025

If you’ve lost your job, you may be able to defer your student loan payments. The unemployment deferment and repayment options available can depend on the type of loans you have.

For instance, if you have federal student loans, one option is the Unemployment Deferment program offered by the government. Unemployment Deferment is a program run by the Department of Education that allows eligible federal loan borrowers who are out of work or cannot find full-time employment to postpone payments on existing educational debts.

Read on to learn how the Unemployment Deferment program works, plus other alternatives, including deferment opportunities for private student loans.

What is Unemployment Deferment?

For anyone who has federal student loans, student loan deferment allows eligible borrowers to put student loan payments on hold for a predetermined period.

Unemployment Deferment is awarded to eligible federal student loan borrowers who are seeking unemployment benefits or who are unable to find full-time work.

Those who qualify can temporarily pause putting money toward student loans for up to three years for federal loans, assuming that they continue to meet all the requirements.

It’s important to note that if you have unsubsidized loans or Direct PLUS loans, interest will continue accruing during any deferment period. This means the balance owed on outstanding loans would keep growing. So, over the life of the loan, a short-term savings from deferring repayment could mean owing more in the end.

In general, interest won’t accrue on federal subsidized loans.

If you qualify for deferment and your loan continues to accrue interest, you can choose between two ways to pay back the interest. First, you could make interest-only payments. Or, you could let the interest accumulate during the deferment, adding whatever accrues to the total balance owed.

Currently, if a borrower decides to forgo interest-only payments and allow interest charges to rack up on an unsubsidized loan, that interest is added onto the total balance of the student loans, which is a process called “capitalization.”

In addition to having a larger loan amount due down the line, future interest is calculated on top of the new balance. Therefore, borrowers pay interest on top of interest, potentially resulting in higher monthly payments than before the deferment.

However, thanks to new regulations that begin in July 2023, this kind of interest capitalization on federal student loans will be eliminated.

What Types of Student Loans Are Eligible for Unemployment Deferment?

If you’re unemployed with student loans, federal student loan unemployment deferment is available for Direct Loans, FFEL Program loans, and Perkins Loans. Here are a few specific examples of loans that may qualify.

•   Direct Loans

•   Family Education Loans (FEEL Loans)

•   Stafford Loans

•   Perkins Loans

•   PLUS Loans

•   Direct Consolidation Loans

In addition, if a borrower received federal student loans before July 1, 1993, they may qualify for other deferments.

Private loans from private lenders are not eligible for the federal Unemployment Deferment program. However, some lenders may provide economic hardship programs for borrowers.

Borrowers can contact their loan servicer for details on any hardship repayment or deferment programs they may offer.

Who is Eligible for Unemployment Deferment?

Deferring payments on federal student loans isn’t automatic.

Borrowers first need to apply with supporting documentation to determine if they’ll be eligible for a student loan unemployment deferral.

Generally, an applicant can qualify either by providing proof of eligibility to receive employment benefits or by demonstrating that a diligent search for full-time employment is underway.

In the second case, certifying that you’re registered with an employment agency (whether privately owned or state run) can help show that an active search for work is being carried out.

Applicants seeking unemployment deferment under the searching full-time employment category may receive a deferment period for only six months.

If you need to extend the deferment past that time, you’ll have to submit a new application certifying that you’ve made at least six attempts to find full-time employment. The deferment period cannot exceed three years.

To pursue unemployment deferral, you must first fill out the unemployment deferment form at StudentAid.gov — answering questions about your job search, current unemployment benefits, and understanding of what loan deferment entails.

What About Private Student Loan Deferment?

Although private lenders aren’t legally required to offer unemployment deferment options, some do.

But, it’s worth keeping in mind that, similar to federal student loan Unemployment Deferment, private loans typically still accrue interest during the approved deferment period (even refinanced student loans with lenders who honor grace periods).

In other words, the total student loan balance would continue to grow even while payments are suspended. This is one of the basics of student loans.

Over the life of the loan, this could add to what the borrower owes overall. Some private lenders allow borrowers to make interest-only payments during a forbearance to help avoid interest capitalization.

Even with the accrual of interest and limited options, deferment is preferable to defaulting on student loans.

Borrowers with private student loans can contact their lender to learn if special deferment is available for those who are unemployed. This private student loans guide may also be helpful.

Advantages and Disadvantages of Unemployment Deferment

So, what are the potential pros and cons of pursuing an unemployment deferment on student loans?

These are some of the advantages and disadvantages you may want to think over:

Advantages

Whether a borrower has been laid off due to an economic downturn or they have recently graduated and are struggling to find employment, unemployed deferment is one way to help ease the financial pressure of repaying student debt in the short term.

For borrowers in need of financial relief, student loan unemployment deferment can help temporarily lower monthly expenses. This can be especially helpful if an unemployed borrower would otherwise run the risk of student loan default.

Defaulting on loans can have a negative impact on your credit history, complicating your ability to pursue mortgage or other loans in the future.

And, with student loans, simply not paying them does not erase the amount owed or the interest that can keep accruing.

If a borrower has only subsidized student loans, the unemployment deferment program comes at no additional cost because interest does not accrue.

And, while it’s completely fine to apply for a deferral, borrowers are typically expected to use the approved deferment period to find a new job; some unemployment protection programs from private lenders even have stipulations to that effect.

Disadvantages

In the case of unsubsidized federal student loans, taking a deferment will increase the total amount owed on the loan. And even if a borrower decides to make interest-only payments, they’re not not chipping away at the principal amount.

Unemployed student loan borrowers may want to weigh whether the short-term savings tied to reduced or suspended loan payments are worth owing more money on those loans later on.

When a borrower does eventually find employment and the deferment ends, the future payments on their student loan payments may be higher each month—to cover the additional accrued interest.

For someone who is just adjusting to a new job, higher loan payments may come as a shock and could be hard to budget for.

Understanding the long-term implications of applying for student loan unemployment deferment can help borrowers to decide whether this sort of program is the right for the current and future financial situations.

Alternatives to Unemployment Deferment

For federal student loan borrowers who don’t qualify for the Unemployment Deferment program, there may be other ways to handle student loans during a job loss.

Forbearance and income-driven repayment plans are two potential options:

Forbearance

Similar to deferment, federal or private loan forbearance temporarily suspends or reduces loan payments.

However, while principal payments are postponed, interest will continue to accrue, no matter what type of loans you have. To see if you qualify, contact your loan servicer.

Because forbearance does not suspend the accrual of interest on a student loan, it can make sense to consider other options, such as income-driven repayment.

Income-Driven Repayment

Income-driven repayment plans calculate loan payments based on a borrower’s current income and family size. They also, typically, stretch the loan repayments over 20 or more years.

There are four different types of income-driven repayment plans run by the US government:

•   Revised Pay As You Earn Repayment Plan (REPAYE Plan)

•   Income-Based Repayment Plan (IBR Plan)

•   Pay As You Earn Repayment Plan (PAYE Plan)

•   Income-Contingent Repayment Plan (ICR Plan)

Although this type of plan may trim monthly loan payments, it could cost borrowers more in interest over the life of the loan.

So, once your financial or employment situation improves, you may want to switch to an alternative repayment plan.

Public Service Loan Forgiveness (PSLF) Program

Having been previously employed in certain public sector jobs may also qualify some borrowers for student loan forgiveness if unemployed.

By definition, loan forgiveness means that the remaining amount owed is, well, forgiven—the borrower is no longer bound to pay it back.

Eligible federal student loan borrowers who’ve completed 10 years of employment with a qualifying job—such as, a public school teacher, some non-profit employees, Americorps recipient, or government worker—might be eligible for the PSLF program.

If you think you may qualify for the federal forgiveness program, and your goal is to lower your monthly payments, you may still want to switch to an income-driven repayment plan while the PSLF application is being reviewed in order to lower your monthly payments.

Student Loan Refinancing

After exhausting federal program options, or if none are quite the right fit, borrowers with federal or private student loans may want to look into refinancing student loans.

When you refinance student loans, you replace your loans with one new private loan. One of the advantages of refinancing student loans is that qualified borrowers may either get a lower monthly payment or help reduce the total interest paid over the life of the loan. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

But it’s important to be aware that by refinancing federal student loans with a private lender, borrowers give up benefits and protections such as federal Unemployment Deferment, PSLF, and income-driven repayment.

Lenders that offer refinancing options usually look at applicants’ qualifying financial attributes—including employment status, credit history, and income. So, refinancing student loans is not necessarily available to all who apply.

The Takeaway

There are numerous possible student loan repayment options for unemployed borrowers who qualify, including deferment, income-driven repayment, federal student loan forgiveness programs, and student loan refinancing. One good place to start is by calling your loan provider to review all options you may qualify for.

If you decide that refinancing your student loans makes sense for your situation, SoFi offers loans with a low fixed or variable rate and no fees. By filling out a simple application, you can find out if you qualify in just two minutes.

Check your student loan refinancing rate today with SoFi.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Everyone loves a good deal, especially when it comes with a little cash back in their pockets.

According to a Lending Tree survey, 87% of U.S. adults have at least one rewards credit card. Another poll found that the majority of rewards cardholders prefer cash-back cards over any other option.

If you’re thinking about adding a credit card to your wallet, here are a few things you might want to know about cash-back rewards, including how cash-back rewards work, and whether this type of rewards card makes sense for you.

What Are “Cash-Back Rewards”?

Cash-back credit cards are offered by many credit card companies to qualified consumers. Consumers can use these credit cards to make purchases, and a certain percentage of that purchase is returned to the customer as a cash incentive. In other words, cash back rewards can be an easy way to make the most of everyday expenses.

Typically, cash-back rewards range between 1% and 2%; however, a few cards offer more.

Some rewards cards offer a set number of points per purchase that can be redeemed later for cash or for goods like airline tickets, discounts at coffee shops, or gift cards.

How Does Cash Back Work?

Cash-back rewards are easy to use. All that consumers have to do is spend as they normally do, and in return, the credit card company calculates the percentage to return to the cardholder based on what they spent on eligible purchases.

For example: A card pays a flat rate of 2% cash back on all purchases. If the cardholder spends $1,000 in a statement period, the card issuer will then give the cardholder $20 in cash-back rewards.

The card issuer pays out the percentage at the end of a given term, which could mean paying it out at the end of a statement period or billing cycle, or even once you hit a predetermined amount, like $20.

Cash-back cards might come in handy for everything from large purchases to everyday needs. Think of it this way — rather than purchasing things with cash, which doesn’t provide any added benefits, a cash-back card could return money right into a consumer’s pocket.

However, in order for that money to really pay off, the cardholder will likely want to pay off the credit card balance every month in full so they’re not accruing interest and fees, and negating that cash-back reward.

One thing to remember is that cash-back cards are different from other rewards cards. There are rewards cards that offer specific travel rewards, cards that partner with gas stations to earn free gallons, and many more.

Four Ways to Redeem Cash-Back Rewards

Depending on the cash back card, there may be a number of different ways you can redeem cash back rewards. Here are some commonly offered options.

1. Credit card balance reduction: This allows you to have your cash rewards applied to your balance and use them to pay off a portion of your monthly bill.

2. Gift cards: Some card issuers allow you to redeem your cash back rewards in the form of gift cards to your favorite retailers or restaurants. To sweeten this deal, some issuers partner with other companies, such as online retailers or airlines, to provide bonus payouts when cash back rewards are redeemed with a gift card.

3. Charitable giving: Several card providers allow users to use their cash back for good, sending their rewards directly to the charity of their choice. All that users need to do is select the charity and the card does the rest.

4. Paper check or direct deposit: You can often redeem your cash-back as just that — cash. In this case, you ask your card issuer to transfer the money directly to your bank account or send a paper check.

The Different Types of Cash-Back Cards

While cash-back cards all work in a similar way, there are some differences between these cards to keep in mind.

Some are flat-rate cards, which means that cardholders receive the same exact cash back percentage on every eligible purchase, be it groceries or plane tickets. This option is easy as users never have to think about the way they use their cards.

Another option is a bonus category cash back card. These cards offer higher cash back percentages on certain purchase categories. For example, you might get more cash back on gas and groceries (say 2% or 3%) than you do on other items (say 1%). If you opt for this type of card, it can be a good idea to make sure the higher variable percentage is for items you purchase often.

Some cards rotate these bonus purchase categories every quarter, and you need to activate your rotating bonus categories in order to earn rewards. Others allow you to choose your bonus category.

Any of these cards may offer additional features, such as:

•   Special promotions One way to earn even more cash back may be via a special promotion run through the credit card. For example, a credit card may typically offer 1% cash-back. However, for one billing cycle, it could partner with a large retailer for 5% cash back for all eligible purchases.

•   Signup bonuses Cash back rewards cards might also come with signup bonuses to attract new customers. This might be a certain lump sum of cash back (say $100) if you spend a certain amount in the first three months. Or, you might be able to earn double or triple cash back for a set period of time.

Potential Drawbacks of Cash-Back Rewards

Cash-back credit cards can come with a few potential downsides that users may also want to be aware of. As with signing up for any new credit card, it’s a wise idea to read the fine print.

For instance, you may want to be sure to read through the contract carefully to understand exactly how the rewards work, what to expect along the way, and also suss out any hidden credit card fees such as late payment fees, balance transfer fees, foreign transaction fees, and more.

It can also be a good idea to find out if the card has a high annual fee, which may negate any earned rewards, and what the APR (annual percentage rate) is, in case you get into a bind and need to carry over a balance month to month. However, it’s key to keep in mind that carrying a balance nearly always outweighs any rewards.

It’s also important to note that many credit cards (cash-back or otherwise) can retain the right to change their bonus structure at any time. That means it could change the percentage of cash users receive in return for purchases for a lower (or higher) amount. So, users might want to be happy with the card and its rates and policies, not just the cash-back rewards, as that could change at any moment.

When looking at the fine print, consumers might also want to identify if the card comes with a cap on possible rewards. Many cards limit just how much money a user is allowed to claim, so make sure to know that number and be comfortable with the limit.

And, again, like all cards, it’s key to pay off a cash-back rewards card in a timely fashion. This way, users won’t be paying interest on purchases with a card that was meant to bring them a little money in return.

Recommended: What Is a Good APR?

The Takeaway

Cash-back is a credit card rewards benefit that refunds the cardholder a small percentage of some or all purchases made with the card. Every time you make an eligible purchase with your cash-back credit card, your card issuer will pay you back a percentage of that transaction. Your cash-back reward won’t necessarily pay out immediately. Like your statement balance, your rewards will accrue each month and show up on your monthly statement.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOCC0623006

There are many reasons why you might want to sock away some cash and perhaps earn interest while you’re at it. Perhaps you’re saving up for a down payment on a house or gathering funds for an epic cross-country road trip. Or maybe you are trying to build up a healthy emergency fund or save for grad school. Or you might just need a safe place with good rewards to store your paycheck as you pay bills.

Whatever the scenario may be, a deposit account can be the answer. There are several different kinds of these accounts that can help your money stay secure but accessible and perhaps earn an annual percentage yield (APY) to help it grow.

Here, you’ll learn about the different account options that are available, including the pros and cons of each.

Basic Checking and Savings Accounts

There are several different kinds of basic checking and savings accounts. You may find standard accounts, premium accounts, and other variations offered by financial institutions. Here are the pros and cons of these deposit accounts.

Checking Account Pros and Cons

First, the pros:

•   A checking account usually has very low monthly account fees or no monthly account fees.

•   A checking account typically allows access in multiple ways. You can write checks and get an ATM card or debit card. You might get access to online and mobile banking apps so that you can mobile deposit money and pay your bills.

•   These accounts provide a hub for your financial life: You have a home for your paycheck to be direct-deposited, you’ll have records of your transactions, and more ways to anchor and track your money.

•   You’ll usually enjoy FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) insurance of $250,000 per account holder, per account ownership category, per insured institution. Some institutions offer enhanced coverage, too.

•   You may find an interest-bearing checking account, though the rate is usually not as much as a savings account.

Next, the cons:

•   Many checking accounts pay no interest or very low interest, so you’re not helping your money grow.

•   There can be minimum balance requirements on checking accounts, especially ones with enhanced levels of service.

•   You may be charged accounts fees as well, which can cut into your cash.

Savings Account Pros and Cons

Savings accounts come with slightly different pros and cons. First, the upsides:

•   Most of the different kinds of savings accounts don’t charge account fees.

•   Savings accounts are interest-bearing, meaning your money can grow, especially through compound interest. However, not all savings accounts are created equal: Some standard accounts pay quite low interest. Look to online vs. traditional banks for higher rates (more on this below).

•   These accounts are also typically insured by FDIC or NCUA.

As for the downsides:

•   You probably can’t access your account via checks or a debit card. You will likely be limited to transfers and ATM withdrawals.

•   In addition, while the Federal Reserve has lifted the six-transaction limitation on savings accounts due to the pandemic, many banks still impose some transfer and withdrawal limitations on savings accounts.

•   You may encounter minimum balance requirements and fees if you go below that amount.

5 Other Deposit Account Options

Here are some other deposit account types you might consider beyond checking and savings:

1. High-Interest Savings Accounts

Some banks offer special, high-interest savings accounts that can offer much higher rates than traditional savings accounts. Some institutions don’t charge monthly fees for these accounts while others do but will waive them if you meet a balance minimum.

As with all savings accounts, you may be limited in terms of the number of withdrawals or transfers you can make each month.

One good place to look for this type of account is at an online bank. Because these institutions typically have lower operating expenses than brick-and-mortar banks, they can often offer rates that can be considerably higher than traditional banks, and may also be less likely to charge monthly fees.

💡 Learn more about how high-yield savings accounts work

2. Money Market Accounts

A money market account is a type of deposit account that pays interest on deposits and allows withdrawals.
Money market accounts are similar to standard savings and checking accounts, except that they typically pay higher interest rates, require higher initial deposits, and may also require minimum balances, which can run anywhere from $100 to $10,000.

Unlike standard savings accounts, some money market accounts also come with a debit card and checks, although institutions may require that they not be used more than six times per month.

You may want to keep in mind the difference between a money market account vs. a money market fund. A money market account is a federally insured banking instrument, whereas a money market fund is an investment account.

Typically, money market funds invest in cash and cash-equivalent securities. It is considered low risk but doesn’t have a guaranteed return.

3. Certificates of Deposits (CDs)

A certificate of deposit (CD) is a product offered by consumer financial institutions, including banks and credit unions, that provides a premium interest rate in exchange for leaving a lump-sum deposit untouched for a certain period of time.

The bank determines the terms of a CD, including the duration (or term) of the CD, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties will be applied for early withdrawal.

CDs offer different term lengths that usually range from a few months to several years. Interest rates tend to be higher for longer terms. Some CDs have a minimum deposit amount that can be over $1,000 or more, though there are banks that offer CDs in any amount.

Sounds good? Well, it is if you know you won’t be touching that money for the entire term length. If you suddenly need the money, then you will likely have to pay a penalty to withdraw money early from your CD.

While you can get no-penalty CDs or early withdrawal CDs, it’s a good idea to make sure to read the fine print, as many of these accounts only have no penalties or withdrawal fees if you take money out during the first few weeks after you invest. In return for that withdrawal window, you often give up a significant amount in APY.

If ease of access is a concern, it might make sense to invest in CDs that feature fewer restrictions around withdrawals. Or, you could set up a CD ladder strategy where you buy CDs that have different maturity dates, ensuring access to funds as your CDs mature at staggered intervals.

4. High-Yield Checking Accounts

Though interest is normally associated with savings, and not checking, accounts, many financial institutions offer high-yield checking accounts.

These interest-bearing accounts, sometimes called rewards checking, work like regular checking accounts and come with checks and an ATM or debit card.

In return for getting a higher interest rate, these accounts often come with rules and restrictions. You may, for example, only earn the higher rate on money up to a certain limit. Any money over that amount would then earn a significantly lower rate.

You may also be required to make a certain number of debit card purchases per month and sign up for direct deposit in order to earn the higher (or rewards) rate and to avoid a monthly fee.

The benefit of an interest-bearing checking account is that you’ll always have access to your money and you may have fewer limitations on how you can use your account than you might with a savings account, all while still earning a bit of interest.

5. Cash Management Accounts

A cash management account is a cash account offered by a financial institution other than a bank or credit union, such as a brokerage firm. These accounts are designed for managing cash, making payments, and earning interest all in one place.

Cash management accounts often allow you to get checks, an ATM card, and online or mobile banking access in order to pay your bills. They also typically pay interest that is higher than standard savings accounts.

Cash management accounts also generally don’t have as many fees or restrictions as traditional savings accounts, but it’s important to read the fine print.

Before opening a cash management account, you may want to ask about monthly account fees and minimum balance requirements.

Some brokerage firms require a sizable opening deposit and/or charge monthly fees if your account falls below a certain minimum. Others will have no monthly fees and no minimums.

Time vs Demand Deposit Accounts

When you consider different kinds of deposit accounts, you may hear the terms time vs. demand accounts. Here’s how they differ:

•   A time deposit, such as a CD, requires you to keep your money with a financial institution for a particular period of time.

•   With a time deposit, if you withdraw funds before the end of the term, you may face penalties.

•   With a demand deposit account (such as a checking account), you may access your cash whenever you like.

•   While you won’t pay a penalty for withdrawing money, you may earn a lower interest rate than with a time deposit account.

Here’s the difference between these two kinds of accounts in chart form:

Opening a Bank Account With SoFi

If you’re looking for a safe, convenient place to keep your money and also earn some interest while you’re at it, there are a number of great options to pick from.

When you open a Checking and Savings account with SoFi, you’ll spend and save in one convenient place, while earning a competitive APY and paying no account fees. Plus you’ll have fee-free access to 55,000+ ATMs worldwide within the Allpoint Network.

SoFi Checking and Savings: The better way to bank.

FAQ

What are the different types of deposit accounts?

There are several different kinds of deposit accounts, including checking, savings, certificate of deposit (CD), cash management, and money market accounts.

What is the most common type of deposit account?

Among the most common types of deposit accounts are a standard checking account or other kind of checking account.

Is a CD considered a deposit account?

A CD is considered a deposit account, but a time deposit vs. a demand deposit. That means that you are supposed to let the money stay in the CD until it reaches the maturity date or else you will likely be charged a fee. A demand deposit account, on the other hand, can be accessed when you please.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0523022